Funny how things can change so fast, isn’t it? This time last year, BP was making $3.96 per share in profits and paying out $2.34 in dividends for a payout ratio of 59%. When I first started writing about BP, I mentioned that the principal risk for shareholders involved the following conditions occurring at the same time (or near in time to each other): adverse legal judgments from the Gulf oil spill, a substantial decline in oil prices, and trouble securing income from the Rosneft project that accounts for nearly 20% of BP’s income. I mentioned those two last risks in passing—as almost a throwaway line—and unfortunately for BP shareholders, that trifecta of events occurred simultaneously to cause profits to fall substantially.
Donald Yacktman once said that investors make serious money when there is a mismatch between an investor’s assumptions about the future of the company and the expectations of the general investor community at large. A lot of times, this shows up in the P/E ratio of the stock. Take Hershey for example. It is aggressively raising prices by 8% in a typical market, and volumes are still growing 3%, 4%, or 5%, depending on whether you use trailing, current, or short-term future expectations to make your projections. All in all, it is working its way through a high point of a cycle where profits could be growing around 12% per year during the 2016, 2017, 2018, and 2019 period.